Pay Attention at Open Enrollment
August 31, 2010
This fall working professionals could see changes to their group health and welfare benefit plans in response to the 2010 Health Care Act mandates. Understanding “what’s new” will be important as it’s likely to impact you and your family. Checking the “same as last year” box may no longer be the right choice, even if it’s what you’ve done for the past several years.
New Options, New Decisions
If you have college-aged children, beginning this fall they may be eligible to stay on your group health insurance plan until age 26, or they qualify under their own employer’s policy. Depending upon your family situation and health
insurance plan, covering another adult child for a few more years may not be costly if you’re already paying for family coverage. However, in some cases an individual plan could be a decent, less expensive solution to insure your healthy young adult child until they get a job with benefits. A health insurance agent can research viable options for your family.
Next, some smaller employers may soon begin offering Simple Cafeteria Plans which are intended to have lower administrative costs for the company. If your employer has never offered pre-tax plans such as Flexible Spending Accounts (FSAs) in the past, keep an eye out for these at open enrollment as funding one could save you some tax dollars. Another new plan which may make its way to employers across the country is the CLASS Program, a self-funded long-term care insurance program. Since unhealthy individuals can’t be denied coverage, some working professionals may see this as their only option for long-term care insurance. However, taxpayer dollars can’t be used to fund this program, so solvency is one concern. If you see this plan appear as a new employer option at open enrollment, speak to your financial advisor and insurance agent about whether it’s appropriate for your situation.
Medical Planning Could Lower Your Taxes
Many of us have long-term financial plans, and it’s wise to now think about a medical plan (and I don’t mean the kind you and your doctor discuss.) A medical plan could be a multi-year strategy to determine the ideal time to incur non-urgent medical expenses, and the best way to pay for them given your insurance, cash flow and tax options. Due to the changes in the Health Care Act, there are several reasons to start planning. Beginning next year you can no longer use the pre-tax dollars in your Flexible Spending Accounts (FSAs) or Health Savings Accounts (HSAs) to pay for over-the-counter medications such as Tylenol, unless it’s prescribed by a doctor. Stock up now on your cold and allergy medicines if you have extra funds in these accounts. In addition to eligible expenses being more limited, the penalty for using HSA funds for “non-qualified medical expenses” (such as non-prescription Tylenol, cosmetic surgery, etc.) increases from 10% to 20% beginning next year.
Next, the IRS will soon be less willing to give you a tax break on your out-of-pocket medical costs, as beginning in 2013 the itemized deduction limit on medical expenses increases from 7.5% of adjusted gross income (AGI) to 10% of AGI. If you have major health expenses coming up, paying for them before 2013 may save you some tax dollars. Also beginning in 2013 the FSA funding limit will be $2,500 per year, indexed for inflation thereafter. (Many plans currently allow you to set aside $5,000 on a pre-tax basis.) This could make HSAs more attractive for many families due to higher funding limits and the triple tax play; dollars go into HSAs pre-tax, the earnings are tax-free, and qualified medical distributions are tax-free. HSAs are associated with higher deductible health insurance plans, so having available cash flow to fund them and meet the annual deductibles should be considered before you make this benefit election. Also, keep in mind that if your insurance plan covers adult children that are not listed as dependents on your income tax return, then you cannot use the tax-free money from your HSA to pay for their medical expenses.
These are just a few of the benefit plan changes working professionals may encounter over the next few years. Paying attention to the fine print and thinking ahead about your family’s medical plan could save you both frustration and tax dollars when unexpected medical expenses arise.
1 Mercer News Release, May 20, 2010.
2 “How to Duck Obama Tax”, Forbes, April 26, 2010.
